Time
May 9, 2012
So voters in France and Greece sent an inescapable signal to the euro zone: No more austerity. In doing so, they showed that the average guy on the street understands economics better than the people in power. Rather than reducing debt and returning the European economy to health, the all-austerity approach to solving the debt crisis was sending the weaker economies of Europe into a death spiral of recession, unemployment, and ultimately, continued strain on national finances.
But there’s a problem. Whatever the verdict of the ballot box, Europe can’t avoid austerity. Its indebted governments can’t simply return to spending and borrowing as they had in the past. Financial markets just wouldn’t stand for it. So the question going forward is not what replaces austerity, but what new mix of policies along with austerity are needed to restore prospects for growth, fix national finances and quell the debt crisis.
There are no easy answers. Austerity, by its very nature, is growth-killing. The trick is finding a combination of policies, both at the national and Europe-wide levels, that can balance out that effect. There is no agreement on how that can be achieved. What we are about to see in Europe is a continent-wide debate on what the next steps might be to both end the debt crisis and restore the euro zone to economic health. The outcome of that debate is highly uncertain.
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